Busy week ahead of the region

It is going to be a busy week ahead for the region, as many economic releases are scheduled. Slovakia and Romania will get to see the 3Q22 GDP structure, the last two countries in the region to do so. The Polish and Serbian central banks will hold their rate setting meetings. We still expect the Serbian central bank to tighten monetary conditions further and increase the key interest rate to 5%, while the Polish central bank should keep the policy rate unchanged. Retail sales growth in October will be published in Hungary, Romania and Slovakia. In Hungary and Slovakia, we expect to see a contraction of retail trade, reflecting the gradual slowdown of consumption. On the other hand, Romania should maintain a rather solid pace of retail sales growth, given the economic downturn. Industrial production is expected to decline in Hungary and Slovakia, amid weakening demand. Finally, Hungary will publish the November inflation rate, which is likely to rise further toward 22%, while in Croatia and Serbia, the PPI Index will be released.

FX market developments

The Hungarian forint swung back and forth throughout the week. The EURHUF opened at 409 and moved down to 406 by Wednesday, then bounced up toward 412 on Thursday, ending the week close to 409. The expected recommendation of the European Commission to accept the Recovery Plan with conditionality, but to proceed with freezing part of the Cohesion funds, could add to the weakness of the Hungarian forint at the end of the week. The National Bank of Hungary held the competitive phase of the 2-month variable-rate deposit tender. The weighted average spread of the accepted bids was 4.95 percent above the reference base rate, resulting in an initial average interest rate of 17.95 percent. The maturity date is January 26, 2023, suggesting that the market believes that the official policy rate and effective rate (one-day deposit rate) will remain unchanged (5pp) until January. The Polish zloty was relatively stable throughout the week, amid the MPC members’ comments that the current level of interest rates is optimal.

Bond market developments

Long-term yields keep declining across the CEE countries, except for Hungary. As the EU funds are to be withheld for the time being, Hungary will need to go to the market to finance its borrowing needs. Other markets will follow the development on the core markets in response, above all, to the publication of data in the US. The PCE Deflator for October arrived below market expectations, while ISM Manufacturing surprised to the downside. Polish 10Y yields dropped almost 60bp week-to-date and they are slightly above 6%. The Slovak long end of the curve moved down by 30bp, putting 10Y yields below 3%, while Slovenian and Romanian yields dropped roughly 20bp. This week, Hungary is going to sell bills. Romania will be active on the bond market, selling 3Y, 12Y and 14Y bonds, while Serbia will hold an auction to sell 6Y bonds.

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